Northeast states’ regional carbon trading system goes live this week

The nation’s first carbon cap-and-trade program starts Thursday, when power plant owners in 10 northeastern states submit sealed bids to buy allowances to emit greenhouse gases. Two other regional programs are to follow, assuring that nearly half of the United States will be covered by carbon trading programs — with or without leadership from Congress and the White House.

“Twenty-four states are working on cap-and-trade” along with four large Canadian provinces, said Judi Greenwald, of the Pew Center on Global Climate Change in Washington. “The federal government was not doing enough in their judgment. They decided they could not wait.”

Five years in the planning, the northeastern states’ Regional Greenhouse Gas Initiative (RGGI) offers what its proponents acknowledge is a “modest” start. It requires a 10 percent reduction in emissions by 2019 — but only in emissions generated by power plants. Some critics note that the program’s carbon caps don’t reflect the fact that milder summers resulted in lower-than-expected energy use in the Northeast over the past few years. In effect, the critics note, the participating states can grow their emissions and still not break the caps.

But RGGI’s supporters are undaunted. They say the program will generate millions of dollars that the states have pledged to use for programs to boost energy efficiency. And they say the program will, for the first time in the United States, set a price on carbon dioxide emissions and provide a model for other states and the federal government.

“I don’t think anyone would argue it’s enough. But it starts the process,” said Daniel Sosland, director of Environment Northeast, a nonprofit advocacy group involved in planning the cap-and-trade effort.

“We have a very short window to get started on global warming,” he said. “And there is a recognition that the state economies will be worse off if we don’t start on it.”

The program’s western counterpart will be more aggressive. Led by California and embracing seven states and four populous Canadian provinces, the Western Climate Initiative will require power plants and industries to cut emissions by 15 percent by 2020. In 2015, the program will expand to cover emissions from transportation, residential, and commercial fuel use.

The western program is scheduled to go into operation in 2012. An initial blueprint [PDF] was released Tuesday, requiring industry to start measuring their greenhouse-gas emissions in about two years. A third program, in the Midwest, last year started planning a cap-and-trade program for six more states and Manitoba. Florida is considering joining one of the regional programs.

These initiatives will bring pressure on the next U.S. president to create a uniform national cap-and-trade program, preempting those who believe the best way to curb carbon emissions is through a direct tax.

“A national program definitely would be much better,” said Radmila Miletich, environmental policy director for the Independent Power Producers of New York. “I do think a national program is coming. Given that, and the very high cost of energy we are all facing, a cautious approach would be best.”

The architects of RGGI say a chief achievement of the planning process was the decision to auction off 100 percent of the allowances that power plants will need to cover their emissions.

Other program designs, including Europe’s approach created under the Kyoto Protocol, gave away part or all of the allowances in a bid to spur the market. In Europe, poor allocation decisions provided a windfall to some industries.

“I think the significance of this program is not really in the emissions reductions that it may achieve. I think the much greater significance is the precedent-setting and the teaching value for national policy,” said Ned Raynolds, who monitored the planning for the Union of Concerned Scientists in Cambridge, Mass.

Under the RGGI (nicknamed “Reggie”) program, 223 power plants in the Northeast will have to buy allowances for all their C02 emissions, starting in 2009. Power plants will have six years to stabilize emissions, after which they will be required to reduce emissions by 2.5 percent per year for the next four years.

The program applies to power plants in Connecticut, Delaware, Maine, New Hampshire, New Jersey, New York, Vermont, Massachusetts, Rhode Island, and Maryland. Power plant emissions are estimated to account for about 25 percent of the total carbon dioxide pollution generated in the area.

Plants that do not meet the goals may be able to purchase “offsets” from projects that create carbon dioxide reductions, such as programs to plant forests or capture escaping methane from landfills. But the use of offsets will be restricted to 3.3 percent of a power plant’s emissions, a concession to critics who say offsets permit companies to buy their way out of pollution rather than reducing their own emissions.

The initial “baseline” goals for 2009 were set in 2005 with a prediction that carbon dioxide emissions from power plants would continue to increase by about 1 percent each year. Instead, energy consumption remained roughly flat in the Northeast, and carbon emissions from the power plants are expected to be about 9 percent below the 2009 baseline set by RGGI.

Analysts say milder weather and a slow economy reduced electric demands, and power plants have switched from expensive oil to cheaper — and less polluting — natural gas or nuclear generation.

“The cap appears to be too high,” said Raynolds. “But it’s good that emissions have gone down.” He acknowledged if that trend continues, the reductions mandated by RGGI would be meaningless. But the program still requires a minimum price — $1.86 per ton for power plant emissions, which Raynolds said will encourage power producers and their larger customers to consider alternative power sources.

RGGI already has spawned two “futures” markets, in New York and Chicago, that bet on the future prices of the carbon allowances. Those futures have been trading at between $4 and $5 a ton. Power plant operators have three years before they have to turn over their 2009 allowances, and many are expected to wait to see where the price settles. The auction Thursday will offer allowances for only 12.6 million of 2009’s 188 million tons allowed, and observers expect it to be a limited “price setting” auction.

Miletich, whose group represents 75 percent of the New York power producers, said customers will see their electricity bills rise by an amount that depends on the final price of the allowances.

“There’s no way to know what this will cost,” she predicted.

Others don’t believe that price increases will be noticeable. “The rate impact will be less than 5 to 10 percent over 20 years,” said Seth Kaplan, vice president for climate advocacy of the Conservation Law Foundation. The increase “is pretty much lost in the noise.”

More importantly, he says, the energy efficiency programs that will be funded by the auctions will help consumers reduce their overall bills.

“This money will prime the pump,” he said.

HOW RGGI WORKS

Power companies in the participating states submitted sealed bids for the first auction, scheduled for Sept. 25.

In the first auction, RGGI offer allowances for only 12.6 million of 2009’s 188 million tons allowed, and observers expect it to be a limited “price setting” auction.

The initial auction involves allowances from six states — Connecticut, Maine, Maryland, Massachusetts, Rhode Island, and Vermont. Other states are expected to participate in a second auction scheduled for Dec. 17. Carbon allowances purchased from one state can be transferred by a purchaser to cover emissions generated in another RGGI state.

Bidders will be notified of the auction results by Sept. 29. Results from the first auction can be tracked here.

After the RGGI states have stabilized power sector carbon emissions at their capped level by 2014, the cap will be reduced each year from 2015 through 2018.